Credit Risk Management Flashcards
6 cards from real Financial Risk Management practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Credit Risk Management flashcards as text
What is 'default correlation' and why does it matter in portfolio credit risk?
Answer: The tendency for multiple borrowers to default at the same time, increasing portfolio loss volatility
Default correlation measures co-movement in defaults; high correlation means multiple defaults cluster together, dramatically increasing tail losses.
Under the Basel III Standardized Approach for credit risk, a corporate loan with no external rating receives a risk weight of:
Answer: 100%
Under Basel III's standardized approach, unrated corporate exposures receive a 100% risk weight for capital calculation purposes.
What is 'potential future exposure' (PFE) in counterparty credit risk?
Answer: The maximum expected exposure to a counterparty at a future date at a high confidence level
PFE is the statistical worst-case future exposure (typically at 95% or 99% confidence) used for credit limit setting and capital calculations.
A credit facility with a 'material adverse change' (MAC) clause protects the lender by:
Answer: Allowing the lender to cancel or accelerate the loan if the borrower's condition significantly deteriorates
A MAC clause gives lenders the right to withdraw or restructure facilities if the borrower experiences a significant deterioration in financial condition.
Expected Credit Loss (ECL) under IFRS 9 requires banks to recognize:
Answer: Forward-looking 12-month or lifetime credit losses as soon as a loan is originated
IFRS 9's ECL model requires immediate recognition of expected losses using forward-looking information, replacing the old incurred loss model.
What is a credit enhancement in a structured finance transaction?
Answer: A mechanism such as overcollateralization or a reserve fund that protects investors from losses
Credit enhancement mechanisms reduce expected losses for senior tranche holders, allowing securitized products to achieve higher ratings than the underlying collateral.
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